After several weeks of consolidation, January crude oil closed in a position to breakout to the upside, as talks between Iran and six other nations to curb Tehran’s nuclear program broke down for the second time in a month. A fresh round of talks began on November 20, however, talks seemed to reach an impasse after a senior Iranian envoy suggested that momentum from the previous round of talks had been slowed.
The U.S., Britain, China, France, Germany and Russia had offered a gradual easing of the sanctions against Iran that have crippled its economy for several years. A senior Iranian official suggested momentum from the previous talks had slowed, meaning that a first-step agreement still had to be hammered out. After the talks stalled, a U.S. official said it would be “very hard” to get a nuclear agreement with Iran this week.
Brent crude oil rallied on the news, increasing the spread between Brent and crude oil. The widening of this spread is the main reason behind the recent rise in crude oil. Although the normal supply/demand fundamentals remain bearish, crude is being underpinned by the rise in Brent. This upside movement may continue indefinitely since there doesn’t seem to be any urgency to reach a deal over the near-term.
Crude oil traders faced volatile conditions this week, but survived because of the rally in Brent crude. On Wednesday, prices rose early in the session after a smaller-than-expected build in crude inventories and a large drop in distillates supported prices. Oil inventories rose for the ninth straight week and remained above average for this time of year, however, the large drop in distillates offset high crude supplies.
The release of the latest Fed minutes pressured crude oil prices, but buyers came in to support the market. News that the Fed had hinted at an early tapering of monetary stimulus helped trigger a surge in the U.S. Dollar, theoretically making crude oil more expensive for foreign traders. The rally in the Greenback, however, failed to ignite a fresh round of selling pressure. This served as a sign that the news about the Iranian talks was exerting the most influence on trader decisions.
Technically, January crude oil held an uptrending support angle at $93.33 this week and the recent low at $93.17. This angle moves up to $93.58 next week and is expected to continue to provide support as long as the spread between Brent and crude oil continues to rise.
The market also crossed over to the bullish side of a Fibonacci level at $94.12. This helped fuel a rally toward a major downtrending angle at $95.94 this week. A breakout over this angle could trigger an acceleration to the upside with potential targets at $96.76 and $98.26. Next week, the angle moves down to $94.94.
Look for speculators to attempt a breakout over the downtrending angle at $95.94.
Sustaining a move above this angle will mean that the talks between Iran and the six other nations have failed to come to a conclusion, leading to a widening of the spread between Brent and crude oil. If an agreement is reached then the market is likely to turn weak again because of the bearish supply and demand fundamentals.